Iran’s petro-economy has faced decades of sanctions and now a war but China still buys

Driving 120km/h in a 100km/h zone is against the law. It is a calculated risk to speed; the perpetrator assumes the punishment is unlikely or even minor. This dangerous cost-benefit analysis is an analogy for the economic relationship between China and Iran. The growth in Iranian oil exports to China, suggests both agree that the commercial and economic benefits of purchasing oil outweigh the risks posed by U.S. sanctions.

China’s refining sector which turns cheap crude into fuel is dominated by state-owned majors and more commonly, “teapots;” so called for their diminutive appearance. State-owned majors and teapots both mean big business. They make China the main buyer of Iran’s petro-economy, buying as much as 90 per cent of Iran’s shipping oil, with Iran generating as much as $70 billion in revenue in 2023 from crude oil and petrochemical exports, per an investigation by The Economist. It is Iran’s most important source of income. To choke this revenue, and the country’s ability to fund proxy militias, the U.S. has spent decades sanctioning Iran and countries who trade with it. Why are the sanctions not working?

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Economic Warfare

All types of economic sanctions are non-military penalties imposed to change another country’s policies or actions. Iran has had trade sanctions targeting many of its industries for decades, such as its energy, shipping, and mining sectors, and crucially its Central Bank. These sanctions are non-military penalties imposed to change Iran’s policy and actions relating to, but not limited to, its support for international terrorism, nuclear and missile development programs and human rights abuses, among other reasons, per a statement by the U.S. government. The sanctions block Iranian government assets in the U.S., ban nearly all U.S. trade with Iran and prohibit foreign assistance.

The U.S. has prohibited firms and individuals from conducting commercial trade with Iran by threatening to impose secondary sanctions. A secondary sanction by the U.S. would have an individual or firm lose access to the U.S. financial system, the de facto world currency.

Sanctions are merely a weapon wielded in the non-military arena, short of war. It must be said that the war on Iran by the U.S. and Israel which began on February 28, 2026 is happening in a different arena (military force). It is “outside the ring.”

The sanctions are more than a headache for Iran who faces inflation, currency depreciation and restricted investment into the country.  But sanctions rarely eliminate economic activity entirely; Iran has been emboldened to find alternative trade networks within its shadow economy, trading internationally with countries undeterred by secondary sanctions. According to the World Economic Forum the traditional consensus among the majority of researchers on secondary sanctions is that they are an ineffective foreign policy tool, for a few reasons. The primary reason is rarely are the economic losses from secondary sanctions large enough to change a country’s policy. And secondary sanctions have been found to consolidate political power in a sanctioned country, by demonising the sanctioning country and raising national pride. They are also difficult to enforce, can potentially instigate new conflicts with allies who object, and have negative consequences for individuals and firms, while sometimes producing no foreign policy benefits.

Before the Iran war, Chinese buyers were saving $8 to $10 a barrel if they bought Iranian Light Crude over non-sanctioned Oman crude. Chinese buyers operate on slim and sometimes negative margins due to a slump in domestic demand, and so are drawn by the discount for Iranian Light. The discount on oil is compensation for the risk Chinese buyers take on.

Chinese buyers purchase from Iranian “shadow fleets” who circumvent sanctions. One way is by relabeling originally Iranian petroleum under different nations. Another is by broadcasting fake tanker route information (known as “spoofing”) to remain untrackable. The modern world relies entirely on the shipping sector to function, yet international waters remain astonishingly anarchic.

On dry land, the Hengli Petrochemical company was sanctioned late April 2026 by the U.S. for allegedly purchasing Iranian oil; but it is China’s second-most prominent teapot targeted so far. It is not opaque and numerous as “smaller” teapots are. Thus, enforcement using sanctions is a tall order, especially for a “lax government,” says the New York Times.

The Strait of Hormuz, which Iran borders in the north, normally carries 20 per cent of the world’s oil and gas supplies. It has effectively been closed since the Iran war began, but Iran was able to continue exporting its own oil, whilst cutting out everyone else and benefiting initially from higher oil prices. This changed 44 days into the Iran war, beginning on April 13 when the United States began a naval blockade of Iranian ports to push Iran closer to a peace deal. Iran found other ways to bypass the blockade, but crude oil exports fell to their lowest level in at least six years, from a claimed 2 million barrels per day (bpd) to below 300,000bpd in May. In dollar figures that is a sharp drop from $5.13 billion in revenues from oil exports over March to $837 million over the course of May, according to Kpler volumes and a conservative barrel price estimate by Aljazeera. Spoofing and relabeling mean some are undercounted.But the oil hasn’t changed, only the sales have fallen. Iran is storing the crude it cannot sell.

Iran’s Laundromat